A proper money management is the main difference between gambling and trading, use a bad money management and you will almost for sure loose your capital completely! But what exactly is the money management and how to get it right? This is what you will learn in this post!
What exactly is the money management?
The MM is a collection of rules telling you how much to invest in a specific trade! There are different forms of money management i will explain in this article. The first important rule is the upper limit :NEVER trade more than 5% of your overall broker balance in a single trade! There is one Money Mangement variant breaking this rule (martingale), but i suggest you don´t use this method!
Different Money Management Methods
There are basically 4 different money management methods you can use, they are: Fixed Amount, Fixed % , Martingale and anti-martingal, lets have a look at their specifications :
Fixed Amount – This is the most popular money management beside martingal. Here you define your trading amount per trade once, lets say 25 USD (remember: never excceed 5% of your balance/capital, choose less if possible) till you reach a specified amount in one of both directions. If you win the most of your trades, and you reach your goal, its time to define a new trading amount or withdraw your profit. In the case you lose to much, you should have a balance level where you decrease the amount per trade to avoid losing all your money!
Fixed % Amount – Same like before, but you define a percentual amount to be calculated before every trade. This way your trading amount will increase if you win a trade, and decrease if you lose a trade! You can also change teh amount of trades till a new calculation.
Martingal – This is the riskiest money management method only suitable for experienced trades! it can massively increase your overall profits, but increases the risk of losing all as well! With this money management, you increase your trading amount whenever you lose a trade as much as needed to make an overall profit with your next won trade. One option would be to multiply your trading amount after a lost trade with 3 for example, this way your next trade could generate an overall profit if it expires in the money! If you lose this trade, you need to multiply this amount again with 3 and so on…Let us assume you trade with only 1 USD per Trade :
Trade =1 USD Lost= 0 USD
Trade= 3 USD Lost =1 USD
Trade 9 USD Lost = 4 USD
Trade 27 USD Lost= 13 USD
Trade 81 USD Lost= 40USD
You see, you need lots of money to use this method without running out of capital after a few losses!
Doubling Up/ Anti Martingal – With this method you increase the trading amount whenever you win a trade till a specific amount of trades are won or one is lost! In the most cases the profit from the last trade will simply be added to the trading amount for the next trade for 2-3 trades in a row!
In my opinion, the first 2 and the last one are the best to be used! martingal can generate fast profits, even with a bad trading pattern, but it can burn your money faster than you can think about it! martingal are often used by so called gurus to sell there not working trading methods as most people will make some money before they burn their account balance! Only use this method with lots of experience and carefully. (A light version would only increase the amount once after the 2-3 lost trade in a row, this way it never reaches these trading amounts!)
How to choose the best money management for your trading style?
The best way to find the optimal MM is to test all of them (except martingal I suggest). Also take a look at your trading style and patterns. Are you often win several trades in a row, if so the last money management could be the best choice for example! You may want to watch this video about the right money management for binary options trading!